When trading futures, most traders only worry about the entry price and leverage. But there is one factor that is more critical for the survival of the account during a crash - the type of collateral. The cash flow of derivatives is divided into two main categories: USDT-collateralized (using stablecoin as collateral) and coin-collateralized (using the coin itself as collateral). Misunderstanding them exposes you to dual risks.
🔸 USDT-collateralized, this is the modern market standard. You use USDT for Long, Short BTC.
It doesn't matter how the price of bitcoin fluctuates, 1 USDT in your margin wallet is always equal to 1 dollar.
When the price falls, you only suffer losses in the PnL position. The risk is linear and easy to calculate.
🔸 Coin-Margined, it's a graveyard for many traders in decline. You use BTC for long BTC positions.
Assume you hold a long position on BTC. When the price of BTC falls:
Your long position turns negative.
The value of BTC that you used as collateral also decreases.
The liquidation price reaches you twice as fast as you calculated. The exchange liquidates you earlier because the value of your collateral is rapidly decreasing.
When Coin-Margined OI volumes are high, crashes are extremely brutal. Therefore, during liquidation, the exchange must sell collateral on the market 👉 Creating more selling pressure 👉 The price falls even more 👉 More liquidations.
🔹 When to use Coin-M? Only when you are a long-term holder who wants to short sell for hedging. When the price falls, you make a profit in BTC from the short position, offsetting the price drop of BTC 👉 Maintaining value in USD.
When to use USDT-M? In all cases of short-term speculation. Keep your collateral in a stablecoin for psychological stability.
Don't be greedy using Coin-M for long positions in an uptrend, hoping for compound profit. When the market changes, compound profit turns into compound loss" and destroys your account.
Be honest, have you ever lost a Coin-M account because you didn't account for the decrease in collateral value?
News is for reference, not investment advice. Please read carefully before making decisions.
